Congress Closes "Strip Club Loophole"

States are now required to prevent welfare recipients from using ATM machines in casinos, liquor stores and strip clubs to spend or access their benefits. The new policy was tucked in the payroll tax cut bill that Congress passed earlier this month, which also extended the Temporary Assistance for Needy Families (TANF) or welfare block grant through the end of the fiscal year.

The needy generally get welfare payments and other public assistance on debit cards known as Electronic Benefit Transfer (EBT) cards, rather than checks. States now will have to adopt policies to block welfare benefits from being used in any EBT transaction in liquor stores, casinos, gaming estalishments or adult entertainment or risk losing federal funds. The U.S. Department of Health and Human Services will spell out exactly what kind of policies states must implement.

Supporters of the new requirements point to several news accounts as evidence that too many welfare recipients were accessing and using their welfare benefits at "questionable locations." A 2010 Los Angeles Times investigation, for example, found that $1.8 million in TANF funds were withdrawn in casinos and $12,000 was accessed in strip clubs.

The Times' series of articles prompted then-Governor Arnold Schwarzenegger to issue an executive order requiring welfare recipients to promise to use cash benefits only to "meet the basic subsistence needs" of their families and ordering state officials to crack down on welfare fraud.

In Georgia, Fox 5 in Atlanta found that $150,000 in TANF cash was accessed in liquor stores, bars and nightclubs, and a probe in Michigan discovered that more than $87,000 in TANF cash had been withdrawn from a Detroit casino over a 12-month period These were among several examples that U.S. Representative Dave Camp, chairman of the U.S. Ways and Means Committee, listed to demonstrate the need for the change.

"In plain language, welfare benefits could no longer be accessed at any of these facilities," Republican U.S. Congressman Geoff Davis of Kentucky said.

Advocates for the low-income say the new restrictions are unnecessary and stigmatize struggling families. "The idea that TANF recipients are using their cash benefits on gambling sprees or drinking them away may make for sensational headlines but is not based on facts," the Washington, D.C.,-based Center for Law and Social Policy, an advocacy group, said in a statement. A parent may withdraw funds to pay rent at an ATM located in a liquor store simply because it is the lowest-cost or most convenient ATM, the group says.

States that fail to employ policies within two years could face a 5 percent cut in their annual TANF funding. For states like California, that could mean losing $183 million from its $3.7 billion annual share or Wyoming could lose $925,000 of its $18.5 million share, according to a state-by-state analysis from the Federal Funds Information for States.

In addition to possibly losing federal money, states are concerned with the costs associated with the new requirements. This includes identifying the ATMs in question and keeping updated lists, says FFIS, which provides fiscal information to state leaders. Given the fluid nature of ATMs, this could be a challenge.

FFIS said a few states have studied the use of welfare electronic benefits at bars and casinos and found a very small percentage (less than 0.1 percent) of TANF transactions occurred at these locations. "This means that states could incur substantial costs to address an issue that does not appear to be a widespread problem," FFIS said in a February brief.

Congress also has asked the Government Accountability Office to look into whether the TANF program is vulnerable to fraud, waste and abuse. As part of this work, GAO is surveying 10 states and looking into the location of where welfare benefits are accessed and type of retailers, FFIS said. The report is expected this May or June.